Intel Earnings Plunge on Soft Chip Sales

Reeling from recent layoffs and a slowdown in the growth of worldwide PC sales, Intel on Wednesday posted profits of US$885 million for the second quarter, less than half of the $2 billion it earned in the same period last year.

Intel, of Santa Clara, Calif., listed earnings of $0.15 per share on revenue of $8 billion for the quarter ending July 1, down from $0.33 per share on revenue of $9.2 billion for the same time last year.

The report beat a forecast of $0.13 per share from analysts surveyed by Thomson Financial, but fell short of their $8.3 billion revenue forecast.

The losses came from poor performance across the board, as the company cited decreases in the number of microprocessors sold, their average selling price and the number of motherboards sold.

The sole bright spot was a rise in the number of flash memory units sold, but that was not enough to rescue Intel from sinking revenues around the globe.

Year over year, Intel counted an 8 percent drop in revenue from the Americas, 14 percent drop in Asia-Pacific and 24 percent drop in Europe. Only Japan, the smallest market, was positive with a 3 percent rise.

Intel is in the midst of a corporate reorganization, begun in April when CEO Paul Otellini predicted the company’s annual profit would reach just US$9.3 billion for 2006, down from $12.1 billion in 2005.

Otellini blamed the drop on a slump in the growth rate of PC sales, excess inventory of microprocessors at retailers and a loss of market share to competitor Advanced Micro Devices. Since then, the company announced July 13 it would lay off 1,000 managers, and has sold its XScale smartphone processor unit for $600 million.

Those troubles are likely to continue. On Wednesday, the company forecast revenue of $8.3 billion to $8.9 billion for the third quarter, lower than analyst estimates of $9.1 billion.

If history is a guide, Intel will reach the lower end of that estimate. Its $8 billion revenue for the second quarter was barely within its first-quarter prediction of $8 billion to $8.6 billion.

Despite the numbers, Intel executives were optimistic about their potential for the second half of 2006.

The company has revamped its entire processor line, counting the launch of the Woodcrest consumer server chip in June, Montecito high-end server chip yesterday, Conroe desktop chip July 27, and Merom laptop chip soon afterward, Otellini said.

The company will also accelerate the launch of its quad-core chips for desktops and servers, releasing them in the fourth quarter of 2006 instead of the first half of 2007, Otellini said during a conference call with investors.

There may be a downside to launching so many new chips at once, since the crowded marketplace forces Intel to cut prices on its older chips to make room for new sales, analysts said.

In its rush to accelerate the launch of new CPUs and to compete with rival AMD, Intel used aggressive pricing in the second quarter to clear vendors’ inventories of existing CPUs, said Charles Smulders, vice president of Gartner’s client computing group.

Indeed, Otellini defended Intel’s low prices on the conference call, saying that the company would sell its Core 2 Duo chips as premium products, and cut prices on Pentium chips to reach new markets, while selling Celeron chips for the very cheapest platforms.

In the meantime, the company will continue the reorganization it began in April.

“We are now a bit over halfway through our structural review process to improve efficiency and agility over the long term,” Otellini said.

That process will include a number of small steps, not a single round of heavy job cuts, he said. Industry rumors had predicted Otellini would announce layoffs of 10,000 people during the call, but that did not happen.

-Ben Ames, IDG News Service (Boston Bureau)

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